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- 🎁 Best Mutual Funds of 2025
Welcome to this week’s Altsights!
As 2024 comes to a close, you’ll be bombarded with lists of Best Mutual Funds for 2025 from finfluencers and media publications 📜
The aggregate time spent preparing and obsessing over these lists is probably the most unproductive time spent.
Yes, the subject of today’s Altsights is a clickbait. I am definitely not revealing the best mutual funds.
Rather, the idea is to bring about a mindset shift where you accept that there are no best mutual funds.
More precisely, nobody can predict the best mutual funds of 2025 with a high degree of certainty.
But I am not just discussing the problem today. I also offer a solution - Good Mutual Funds ✅
Note: Occasionally, I name certain mutual fund schemes - and even stocks - below. These are simply examples and not investment recommendations.
50+ Lakh Searched For ‘Best Mutual Funds’ in 2024
We want the best with the least effort at zero cost. (see the contradictions?)
We search for the best phones, best cars and best mutual funds online and trust strangers on the internet.
No wonder the $500 billion wealth management industry churns out a new list of the ‘best mutual funds’ every few weeks and months to keep us engaged.
The Best Mutual Funds Change Regularly 🔄
Many investors believe that the best funds of the past are likely to be the best funds of the future 🧐
So, someone investing on 1st Jan 2023 will simply invest in the best mutual fund schemes of 2022.
Let’s test this approach by considering the universe of flexi cap funds.
Scheme Name | Rank in 2022 | Rank in 2023 |
|---|---|---|
HDFC Flexi Cap Fund | 1st | 13th ❌ |
Quant Flexi Cap Fund | 2nd | 12th ❌ |
ICICI Flexi Cap Fund | 3rd | 17th ❌ |
JM Flexi Cap Fund | 4th | 1st ✅ |
Franklin India Flexi Cap Fund | 5th | 11th ❌ |
As you can see, 4 out of the top 5 funds of 2022, didn’t rank even in the top 10 flexi cap funds in 2023.
Note - This is not cherry-picked data. You’ll find that this observation holds across various fund categories and various periods.
Why Best Mutual Funds Change Regularly 🤔
In one word - cyclicality 🔄
Cyclicality is one of the few truths of the stock market.
If something is doing well today, it will do not-so-well when the cycle turns and vice versa.
Cyclicality affects mutual funds in two big ways.
#1 Cyclicality in Sectors/Market Caps 🔄
All stocks fall into two main categories - sectors and market cap.
Example 1 - Sun Pharma belongs to the Healthcare sector (Pharmaceutical industry) and is a large cap (a top 100 company by valuation)
Example 2 - Berger Paints belongs to the Chemicals sector (Paints industry) and is a mid cap (ranked between 101 and 250 by valuation)
Different sectors and market caps perform at different times as you can see below -
Performance comparison of sectoral indices
Large cap vs Mid cap vs Small cap
Certain mutual fund categories have sector/market cap restrictions. Such categories (especially sectoral funds) are most subject to the market’s cyclicality.
Example - Sectoral funds are required to invest 80% to be invested in a company of a certain sector (like IT or Finance).
On the other hand, categories like flexi cap, multi cap, and large and mid cap have fewer restrictions.
#2 Cyclicality in Investing Styles 🔄
Investing styles are specific to fund managers/fund management teams.
A fund manager may prefer either value investing or growth investing.
Value investing prefers stocks that are undervalued by the market. The idea is to invest and wait for the market to value them fairly and profit when that happens.
Growth investing, on the other hand, prefers stocks that are growing fast and attract high valuation for their high growth potential.
👉🏼 Value stocks and growth stocks tend to outperform each other under different macroeconomic conditions.
Similarly, fund managers may prefer either concentrated portfolios or diversified portfolios.
Concentrated portfolios are where the fund manager invests in only a handful of stocks. Example - Motilal Oswal Multicap Fund invests in just 19 stocks.
Diversified portfolios, on the other hand, are where the fund manager invests in many stocks. Example - Nippon India Multicap Funds invests in 117 stocks.
👉🏼 Concentrated and diversified portfolios tend to outperform each other under different market conditions.
With so many micro-cyclicalities manifesting themselves in the stock market, the cyclicalities in the list of ‘best funds’ are logical.
So Should We Stop Predicting The Best Funds? 🤷🏻♂️
Yes and No.
✅ We should stop changing our mutual funds basis frequently released lists of ‘best funds.’
✅ We should be comfortable with short and medium periods of underperformance in funds in our portfolio.
❌ But we shouldn’t leave everything to luck.
Introducing Good Mutual Funds ✅
Good mutual funds are those with:
Long performance track records and
Stable fund management teams
These funds may neither be among the best performers nor the worst performers in the short term but would shine over long periods because of consistency.
Example - Parag Parikh Flexi Cap Fund doesn’t rank even among the top 10 flexi cap funds in the last 1 year. But it ranks 1st over the last 5 and 10 year periods.
Someone looking at just star ratings or best funds of the last 1 year would easily miss this!
There are plenty of good funds in the market. All you need to do is look!
Indexing Your Way To Wealth 💰
Another category of good funds is index funds 📊
Index funds are different from most other equity funds because they don’t engage in active stock picking.
An active fund deploys a research team that tries to identify stocks with the potential to outperform other stocks and its benchmark index (like NIFTY 50 for large cap funds).
However, index funds don’t get into this at all 🚫
While a large cap fund will try to create a portfolio of stocks to beat the NIFTY 50, an index fund will simply invest in the NIFTY 50 stocks.
👉🏼 There’s a popular school of thought that places passive investing above active investing.
The argument made by ‘indexheads’ is simple:
Index funds don’t have the research and management costs associated with stock picking.
So, the lower management fee of index funds is a certain benefit and trumps the uncertain benefit of active investing.
This may sound like being stingy but being stingy in investing is great.
Here’s a report by SPIVA that proves that most active funds actually fail to beat their benchmark indices:
The majority of active funds have failed to beat their benchmark indices in recent years
I believe index funds are a great way to steadily grow your wealth without obsessing over lists of ‘best funds.’
To Sum Up
➡️ It is impossible to predict the best mutual funds of the future
➡️ Past performance is not a great indicator of future performance
➡️ Stop obsessing over the regularly published lists of ‘best funds’
➡️ Good active funds have long performance records and stable management teams
➡️ Investing in index funds can help you beat many if not most, active funds
Hope you liked this week’s Altsights.
See you next week!
Cheers,
Madhu,
Founder, Altcase